VC#8 | Ideal D2C P&L
learnings from 3 years of sifting
Quick post - will stick to the bullet points.
Over last 3 years, I have evaluated ~150 or so D2C companies. This post began as a quick email crasher for a couple of friends who are starting up in this space. I thought I will jot it down here in case it helps out anyone else too.
Caveat - these are average structures. They can change drastically depending upon industry / product / stage. Best to think of these as medium term goals.
We are aiming at a Growth rate of at least 25%
We need a Gross margin of 50-55%:
COGS1 needs to be ~25-30% (can change as one hits scale and is a good medium term goal)
All direct costs (including gateway, packaging, shipping, returns, discounts etc) should be in the ballpark of ~20%.
We need an EBITDA2 (or, ideally, PBT3) of 20-25%:
Marketing should NOT be more than 20-22%.
Opex, G&A and Salaries should not be more than 10-12%.
Important things to pay attention to:
If your COGS is not low enough, nothing will fix that issue. Business will die before it even begins. The 25-30% level I have indicated is an average case. e.g. on big ticket items like specialty coffee brewing machines (AOV of INR 75-80k+), the COGS will never be at this level, but then the AOV is high enough to make the juice worth the squeeze. In categories like Beauty, the COGS will be as low as 5%. In any case, the structure has to work for your products. e.g. shipping costs will be very high for mattress companies (weight), COGS will be low (relatively) and return rates high.
Pay close attention to returns. It is a symptom of larger issues. Ideally, one has to make sure that returns as a % of sales are trending down or holding. If not, you have a much bigger problem at hand - either product is off, there is fraud going on, or the communication is not very good.
It is a very common fallacy that overspending on marketing builds great businesses. It does not. The most amazing businesses I have seen do not exceed the 20% threshold. There are edge cases where even a 40% marketing spend makes sense when you have a very cash-rich balance sheet and you have some seriously high LTV potential but it is very rare. It will be difficult to overstate how many brands get into the trap of 2-3x RoAS4, no organic, single digit repeats.
Organic and repeats are the lifeblood of incremental revenue. You need to have a rapport with your customers so you are not spending on CAC each time. That saving flows directly to your bottomline. If you are not growing at 20-25% on a 20% MER5 - you need to revisit what’s happening on the organic / repeats front.
Watch and shape the AOV6 so it makes sense for your per-transaction fixed cost and logistics. As an example, in the US - this cost structure will translate into an AOV of 60-80$. In India, shipping costs are low(er), so you can afford to have a proportionately lower AOV.
Use the employee cost benchmark as a scaling marker. E.g. if you have 10 employees at an average salary of INR 1mn (10 lakhs) each, you need to get to ~INR 100mn (10 cr) revenue quickly. Once again - it is a marker. At times you are gearing up for growth, this will very likely go out of whack - and that’s OK.
Sometimes you will overspend on marginal CAC to drive growth. Depending upon your objectives, that is perfectly fine. My personal bent will be to prefer being more profitable at 25% MER than grow faster (if my much higher marginal MER is still cash-flow / LTV positive within an allowable payback period). This does NOT have to work for you.
As always, I look forward to hearing from you. If you liked this post, pls feel free to share this or subscribe to this newsletter using the links below. While I have been tardy of late, I try to write a 1000-2000 word essay once a week.
Cost of Goods Sold - your raw materials and effort that went into building whatever you are selling.
Earnings before interest, taxes, depreciation and amortization.
Profit before Taxes.
Average Order Value.
Really liked this quick, short and crisp knowledge byte on D2C businesses. Wanted to check if there is any benchmark or thumb-rule on the timeline by which a business should net positive or reach a certain scale.